Nevada Supreme Court Clarifies Application of the Anti-Speculation Doctrine to Water Permit Extension Requests

In Nevada, water is a public resource, meaning no person or entity can hold ownership title, but at most can enjoy the right to beneficial use. A party who wishes to appropriate water must apply for a permit from the State Engineer. If the applicant shows that they will put the water to beneficial use and gives a timeline for their project, the State Engineer may grant them a water rights permit for up to ten years, allowing extensions if necessary. Importantly, the permittee can satisfy the beneficial use requirement by showing a third party’s intent to put the water to beneficial use. Although, to ensure the permittee is not speculating on the water, or marketizing their permit by seeking the highest-paying third party, they must show a contractual or agency relationship with the party intending to use the water. In Sierra Pacific Industries v. Wilson, 440 P.3d 37 (Nev. 2019), the Nevada Supreme Court offered clarity as to how the anti-speculation doctrine applies to permit extension requests.

For context, Nevada codifies water appropriation rights in NRS Chapter 533. NRS 533.370 and 533.380 detail the requirements to obtain and extend, respectively, a water rights permit. Both statutes require an applicant to show that the water will be put to beneficial use. Specifically, NRS 533.370(1)(c) requires that an applicant have satisfactory proof of good faith intention to appropriate the water for a beneficial use and practical means to achieve that intended use. Additionally, NRS 533.370(3)(a) requires the State Engineer to examine whether the applicant has justified the need to appropriate the water. NRS 533.380(3) dictates that the State Engineer may grant an extension of up to 5 years to a party who provides proof and evidence of good faith and reasonable diligence of their pursuit to appropriate the water. This applies to each extension request, creating an ongoing duty for the permittee. NRS 533.380(6) defines reasonable diligence as, “the steady application of effort to perfect the appropriation in a reasonably expedient and efficient manner under all the facts and circumstances.” If evidence of good faith or reasonable diligence is lacking, NRS 533.395(1) provides the State Engineer with discretion to require further proof of a permittee’s good faith and reasonable diligence.

In Desert Irrigation, Ltd. v. State, 113 P.2d 835 (Nev. 1997), the Nevada Supreme Court addressed speculative water rights permit extension requests. There, the court determined that an extension request based upon mere statements of intended beneficial use was impermissible as it did not satisfy the NRS 533.380(3) statutory requirement of good faith and due diligence. The Nevada Supreme Court expounded on this concept in its adoption of the anti-speculation doctrine. Taken from Colorado common-law, the anti-speculation doctrine precludes a party from obtaining a water rights permit if they do not intend to use the water for their own beneficial purpose and have no agency or contractual relationship with a party who does. Bacher v. Office of State Eng’r, 146 P.3d 793 (Nev. 2006). In Bacher, the court reasoned that NRS 533.370(3)(a) was ambiguous as to whether the need to appropriate the water must be an applicant’s need, or whether a third-party could satisfy the requirement. Applying the anti-speculation doctrine, the court clarified this ambiguity and affirmed the Nevada public policy to safeguard the beneficial use of water, while acknowledging the reasonability of a third-party appropriator. The opinion highlights the need for the applicant to show a contractual or agency relationship with a third-party, also called the formal-relationship requirement. Further, the doctrine aligns with the language of NRS 533.370(1)(c) requiring good faith intent and practical means for beneficial use from a third-party appropriator.

Recently, the Colorado Supreme Court extended the application of the anti-speculation doctrine to generic option contracts. In Front Range Resources, LLC v. Colorado Ground Water Commission, 2018 CO 25, ¶ 29, 31, the court asserted that an applicant who presents an option contract with a third-party does not avoid the anti-speculation doctrine regardless of their ability to show the third-party’s commitment to use the water and willingness to testify on behalf of the applicant. There, the court reasoned that an option contract is speculative because it only grants a third-party the right to appropriate the water if they choose to do so, whereas the anti-speculation doctrine mandates a firm contractual commitment to beneficially use the water.

In Sierra Pacific, the Nevada Supreme Court took direction from Front Range and explained the application of the anti-speculation doctrine to permit extension requests. Here, Sierra Pacific Industries sued the State Engineer for improperly granting a water rights permit extension to Intermountain Water Supply, Ltd (“Intermountain”). In 2002, Intermountain received three permits to develop a water transmission pipeline, estimating the project to take ten years. Although, since 2011, Intermountain has received permit extensions to seek a third-party buyer for their water rights. During this time, Sierra Pacific, an irrigation and agricultural business, sought to acquire the water rights to expand their operation. In 2016, the State Engineer granted the extension at issue, concluding Intermountain did not violate the anti-speculation doctrine because they submitted an affidavit detailing an option agreement between two firms who had experience in water systems development. The Nevada Supreme Court rejected this argument, applying the reasoning in Front Range, citing their previous decision in Desert Irrigation, and discussing the statutory similarities between the requirements for a first-time permit applicant and a permittee seeking an extension to conclude that granting an extension based upon a generic option agreement is too speculative of grounds to overcome the anti-speculation doctrine. Without a formal-relationship with a third-party who would put the water to beneficial use, Intermountain violated NRS 533.380(6) and further did not comply with NRS 533.395(1) after failing to show a firm contractual commitment from an end-user who would put the water to beneficial use. Consequently, the Nevada Supreme Court reversed and remanded to the district court to determine whether to allow Intermountain the opportunity to rectify its breach of NRS 533.380(6) and 533.395(1).

Sierra Pacific demonstrates the Nevada Supreme Court’s commitment to the protection of water as an important public resource. While the case addresses the narrow issue of option contracts in extension requests, its ruling acts as a forewarning to entities in similar scenarios to ensure a firm contractual commitment with a third-party before applying for a permit extension.